La Sala v. Comm'r, T.C. Memo. 2016-42
| Decision Date | 08 March 2016 |
| Docket Number | T.C. Memo. 2016-42,Docket No. 20773-13L. |
| Parties | ESTATE OF ANTHONY LA SALA, DECEASED, KENNETH LA SALA, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Richard Joseph Sapinski, for petitioner.
Robert W. Mopsick, for respondent.
LAUBER, Judge: In this collection due process (CDP) case we are asked to review, pursuant to sections 6320(c) and 6330(d)(1),1 the determination by the In-ternal Revenue Service (IRS or respondent) to uphold a notice of Federal tax lien (NFTL) filing. The lien relates to unpaid interest on a Federal gift tax liability for the taxable year 2003. The Estate of Anthony La Sala, through executor Kenneth La Sala, agreed that it was liable for this gift tax when it settled an earlier Tax Court case, Estate of La Sala v. Commissioner, T.C. Dkt. No. 12409-08 (stipulated decision entered October 27, 2010). The estate contends that, under the terms of that settlement, no interest was payable on the 2003 gift tax liability. We disagree and uphold respondent's determination.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated by this reference.
In August 2001 Anthony La Sala (Anthony), then age 93, formed ALS Family LLC (ALSF). In exchange for a 100% ownership interest, Anthony contributed to ALSF cash, marketable securities, and fractional equity shares in two other companies: a 25% share in La Sala Holding Co. and a 10% share in M.H. Partners (fractional equity shares). On January 1, 2003, Anthony, then age 95, sold to his daughter and his two grandchildren, in exchange for an annuity, a 99% interest in ALSF. Anthony retained a 1% interest.
In exchange for his 99% interest, Anthony was to receive an annuity of $913,986 per year to be paid for the rest of his life. For purposes of effecting this transaction, Anthony valued the transferred 99% interest at $2,781,900 and his remaining 1% interest at $28,100. In determining these values he applied discounts of 50% and 35%, respectively, to the values of the fractional equity shares held by ALSF.
Anthony died on January 9, 2004, having received one annuity payment, which was made by his daughter and his grandchildren with funds distributed to them by ALSF. Kenneth La Sala, as executor of Anthony's estate, timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The Form 706 reported Anthony's 1% interest in ALSF as an asset of the estate with a value of $28,100. The Form 706 reported the sale of his 99% interest on Schedule I, Annuities. The estate took the position that Anthony's life expectancy exceeded one year on January 1, 2003; if that were so, the private annuity transaction would be respected and the value of the 99% interest in ALSF would be excluded from the gross estate. See sec. 1.7520-3(b)(3), Income Tax Regs.
The IRS selected the estate's return for examination and determined a deficiency in Federal estate tax of $1,999,045. The IRS concluded that the estate had used excessive discounts in valuing the fractional equity shares held by ALSF and that the date-of-death value of its assets was $4,368,534. The IRS further determined that, under section 2036, the full value of ALSF's assets was includible in the gross estate as opposed to the 1% interest the estate had reported.
The estate timely petitioned this Court for review of the estate tax deficiency, Estate of La Sala v. Commissioner, Docket No. 12409-08, and that case was calendared for trial in December 2009. Robert J. Alter served as counsel to the estate, and Joseph Boylan represented respondent. Before trial the parties reached a basis of settlement. The IRS conceded that Anthony, as of January 1, 2003, was reasonably expected to survive for at least one year. The estate conceded that the fair market values of the fractional equity shares held by ALSF were understated by the claiming of excessive discounts. And the parties agreed that, to the extent the value of the transferred 99% interest exceeded the consideration paid therefor--i.e., the value of the annuity--the excess constituted under section 2503 a taxable gift to Anthony's daughter and grandchildren for the taxable year 2003.
Mr. Boylan attended the calendar call and lodged with the Court a stipulation of settled issues. Although this stipulation recited that the parties had resolved all issues in the case, it did not state all terms of the settlement explicitly. While reciting the parties' agreement that the values of the fractional equity shares held by ALSF "were understated by claiming excessive discounts of 35% * * * and 50%," the stipulation did not specify what discounts were appropriate. And while reciting the parties' agreement that "the amount by which the determined value of those two assets exceeds the consideration paid constitutes a taxable gift pursuant to I.R.C. § 2503," the stipulation did not specify the amount of that taxable gift. Noting these omissions, the Court gave the parties 60 days to file decision documents.
Before entry of decision, Mr. Boylan left respondent's employ. Robert Mopsick replaced him as IRS counsel in the case at docket No. 12409-08. Because the terms of the stipulation did not explicitly resolve all relevant issues, Mr. Mopsick initially questioned whether a settlement had actually been reached. On June 4, 2010, the estate filed a motion for entry of decision seeking to enforce the settlement. Representing that the parties had agreed to apply a 25% discount in valuing the fractional equity shares held by ALSF, the estate urged the Court to enter a decision "that there is a deficiency in Estate Tax due from the petitioner in the amount of $177,418 and Gift Tax in the amount of $234,976." The proposed decision document stipulated that, "effective upon the entry of the decision by the Court, petitioner waives the restriction contained in I.R.C. §6213(a) prohibiting assessment and collection of the deficiency (plus statutory interest)."
On June 24, 2010, Mr. Mopsick notified Mr. Alter of respondent's concession that a settlement had indeed been reached, and the estate thereupon withdrew its motion for entry of decision. The parties then began to exchange documents and calculations to compute the estate tax deficiency and gift tax liability to which the settlement gave rise. Employing a 25% discount for valuing the fractional equity shares, the parties calculated a gift tax liability for taxable year 2003 of $235,207. Although interest on that gift tax liability would have been a deductible expense in computing the estate tax, neither the estate's nor respondent's calculations took account of any interest on the gift tax.
In September 2010 Mr. Mopsick requested that the estate execute and file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, reporting the agreed gift tax liability. In October 2010 the estate executed and sent to the IRS a Form 709 reporting a taxable gift for 2003 of $1,025,343 and a gift tax liability of $235,207. This gift tax return included the following notation: "The filing of this return is conditioned on the concurrent filing of a Decision with the U.S. Tax Court in Estate of Anthony La Sala, Docket No. 12409-08, reflecting an estate tax settlement reached by the Estate and the Internal Revenue Service."
The parties' attorneys executed a decision document showing a recalculated estate tax deficiency of $160,176. This deficiency reflected the treatment of the 2003 gift as a prior taxable gift and the allowance of deductions for additional attorney's fees. This Court on October 27, 2010, entered a stipulated decision accordingly. (This decision did not mention the 2003 gift tax liability because the notice of deficiency in the case at docket No. 12409-08 determined a deficiency in estate tax only.) On November 15, 2010, the estate sent the IRS a check for $230,838, representing the estate tax due plus interest of $70,662, thus discharging the estate tax liability in full.
On November 18, 2010, the estate sent the IRS a check for $235,207, representing the 2003 gift tax liability but without interest. On January 3, 2011, the IRS processed the Form 709 and assessed the gift tax as reported plus penalties for late filing and late payment. That same day the IRS Cincinnati Service Center sent the estate a Notice CP161, Request for Payment--Federal Gift Tax, showing an unpaid balance due of $484,683. This comprised gift tax of $235,207, a late filing penalty of $52,922, a late payment penalty of $58,802, and statutory interest (including interest on penalties) of $137,752.
On February 1, 2011, counsel for the estate sent a letter to the IRS Cincinnati Service Center, noting that the gift tax liability had already been paid and objecting to the imposition of interest and penalties. That letter apparently elicited no response. On January 17, 2012, the IRS sent the estate by certified mail a Notice of Federal Tax Lien Filing and Your Right to a Hearing.
The estate timely requested a CDP hearing and, on June 22, 2012, a settlement officer (SO) from the IRS Appeals Office conducted a telephone hearing with counsel for the estate. The estate pointed out that the gift tax liability had already been paid; contended that no penalties were justified because the gift tax was paid pursuant to a settlement; and argued that no interest was due because the gift tax was allegedly a mere "notational amount" used in calculating the estate tax deficiency. The estate did not request a collection alternative.
The SO verified that the gift tax for 2003 had been properly assessed and that the provisions of applicable law and administrative procedure had been followed. She ensured that the estate's gift tax payment was correctly posted to its account as of November 18, 2010. She abated in full the late filing and late payment penalties, as well as all...
To continue reading
Request your trial